The first earnings report from a freshly minted stock is always a nail-biter. That was the case with Roku (ROKU +2.85%), maker of streaming-video devices, which just released its inaugural set of quarterly figures following its popular initial public offering in September.
Although analysts expected a significant earnings loss, they also believed the company would post hefty year-over-year revenue growth. So did Roku deliver? Read on to find out.
Image source: Getty Images.
Streaming higher sales
For the third quarter of 2017, Roku posted net revenue of just under $124.8 million, which was 40% higher than the same quarter of 2016. In terms of revenue mix, the company's hardware offerings -- essentially its set-top boxes -- were responsible for 54% of the quarter's total. The platform segment (basically software) comprised the remainder.
Of the two, the latter saw better growth. Its take increased by 156%, while hardware's rose by 4%.
On the bottom line, the company booked an adjusted net loss of $8.6 million ($0.10 per share), an improvement over the $14.2 million ($0.17) in red ink it spilled in the year-ago Q3. Both line items were much better than analysts had expected. On average, they were modeling revenue of $110.5 million and a per-share adjusted net loss of $1.37.
As with Roku's top line, certain key operational metrics rose precipitously. Here are the highlights:
| Metric | Total |
Year-Over-Year Growth |
|---|---|---|
| Active accounts | 16.7 million | 48% |
| Total customer streaming hours | 3.8 billion | 58% |
| Average revenue per user (ARPU) | $12.68 | 37% |
Data source: Roku.
These jumps can partially be attributed to general trends in the market -- after all, cord-cutting (i.e., abandoning cable/satellite subscriptions for streaming services) is becoming a more popular option for TV watchers. But Roku has also managed to increase its take from advertising, which comprises the bulk of its platform-segment revenue.
These results made Mr. Market very happy. Roku's stock blasted into the stratosphere the day after the results were unveiled, with its price rising by almost 55% as of this writing.
This Fool's take
Roku has a very sensible strategy for its future, which is to bolster platform revenue. After all, as is typical in the hardware-software mix, software offers much higher margins. For Roku, the gross margin in the platform space was 72% in Q3, far above the 13% of its hardware offerings.
So it's no wonder that investors love the Q3 growth figure for the platform segment (a key reason, I suspect, why the shares popped so high). But as my colleague Evan Niu points out, a fat chunk of Roku usage comes from the Netflix (NFLX +0.20%) and YouTube channels; Roku makes little money through these.
The company said that around two-thirds of its Q3 platform revenue derived from advertising it served on ad-supported channels. It doesn't, however, include either Netflix or YouTube, which means growth in the all-important platform segment depends on the far less popular channels.
That might be an issue. Personally, I've owned and used a Roku for over three years. But I can't remember even one instance in which I or Mrs. Volkman watched, say, The Roku Channel.
Meanwhile, although the company makes good hardware, it's certainly not the only game in town for streaming devices. There are a raft of set-top boxes available on the market, and most have broadly the same features as the current Rokus. And yes, you can do your Netflix binge-watching or YouTube cat-video surfing through these devices, too.
At the end of the day, while Roku's inaugural earnings report was justifiably a hit, I'd give the company's shares a miss. In my opinion, there are better ways to invest in streaming -- say, with a set-top-box maker that has successful operations in other hardware segments like Apple, or a pure-play content provider such as Netflix. For me, using Roku only for my video entertainment needs will be sufficient for now.
